The great white hope

In 2015, it was a rare light in the darkness; last year, a market driver. Today, junior lithium mining is a frantic race for reserves, scale, output and orders to win a spot among the sector’s established producersBy Kerry Banks

March 2, 2017

In demand: Raising money hasn’t been hard for lithium miner Patrick Highsmith, president and CEO of Pure Energy Minerals: “We’ve found quite an appetite”

Gambling in Nevada is typically conducted in Las Vegas or Reno, but there is now an entirely new type of gambling taking place in a bleak, sun-blasted valley located midway between these two cities. Here a cluster of sharp-eyed speculators, fast-talking promoters and high-risk investors have joined a frenzied quest to locate and tap into a new American source of lithium, a soft, white metal that Goldman Sachs dubbed “white gasoline” and The Economist described as “the world’s hottest commodity.”

According to figures from the Nevada Division of Metals, 25 companies staked more than 10,500 lithium claims across Nevada in 2015 and 2016. Prior to 2015, there were barely any lithium claims in the state at all. These claims surround the only producing lithium brine operation in North America: Albemarle Corp.’s Silver Peak, which has been operating since 1966. The surge in activity has been matched by the materializing of dozens of companies with “lithium” in their titles on global stock exchanges—especially the TSX and TSX-Venture. These juniors are chasing lithium not only in Nevada, but also in Argentina, Canada and elsewhere around the globe.

Pure Energy Minerals Ltd. (TSX-V:PE) is one of those companies that hopes to carve out a spot for itself in these sweepstakes. Since going public in a reverse takeover in late 2012, the Vancouver-based outfit has acquired 9,324 acres of property in Nevada’s Clayton Valley, adjacent to Albermarle’s lithium operation. According to its drill samples, Pure Energy has the equivalent of 816,000 metric tonnes of lithium carbonate floating in pools of salty water just below the surface of this parched wasteland.

It’s early January, and Patrick Highsmith, Pure Energy’s president and CEO, has just returned from the site where he squired around a group of potential investors. To date, money has not been hard to raise. “We’ve found quite an appetite,” he says in a telephone interview from his hometown office in Denver, Co. In July 2016, the company announced it had finalized terms on a $5-million private placement that was brokered by a syndicate led by Dundee Securities. “It was oversubscribed. We raised $6.1 million,” he explains.

“Most of our capital has come from retail investors, but going forward my focus will be on marketing to institutions,” says Highsmith. “Most of the market is waiting for PEA [preliminary economic assessment] numbers and a demonstration plant. The investors want to see that. I’d say that we’re still perhaps four years from production. We’re still sorting out the economics at this point.”

Lithium hotbed: Pure Energy is one of many mining companies working in Nevada’s Clayton Valley

In that sense, Pure Energy is like most of the companies in this niche sector, all trying to raise money, gain an edge, reward their backers, prove their resources and pursue a hot commodity. And who could blame them? When things really started picking up around lithium in 2014, 2015 and early 2016, investment activity in most of the rest of the mining world was at a near-standstill. By comparison, in the first half of 2016 alone, according to Mining.com, the lithium exploration outfits gained access to more than US$330 million in funding.

Investment manager Rick Rule, president and CEO of Sprott Global Resource Investments, says that money is still flowing into this sector, propelled “by the incredible hoopla about the coming of electric cars and green energy and a giant factory in the desert. It’s a great story and it’s a story that you can raise money with.”

The giant factory that Rule is referring to is a US$5-billion structure (so large that three Central Parks could fit inside) that Tesla Motors started building near Reno in June 2014, in partnership with Panasonic, for the purpose of making lithium-ion batteries. And in January of this year, the first batteries made in the Gigafactory began coming off the line. It’s expected to be at full capacity in 2018.

Lithium has a myriad of uses, including powering smartphones and laptops, but its real growth potential is in the batteries used in electric vehicles and grid storage because of the amounts of lithium they require—an electric vehicle contains 20 kilograms of lithium carbonate in its battery packs, compared with just 28 grams in a notebook computer.

Tesla CEO Elon Musk says that he needs his Gigafactory to make enough lithium-ion batteries to power all of the Tesla Model 3 electric cars that the company plans to manufacture—500,000 per year as early as 2018. To meet that ambitious goal, the Gigafactory will be required to purchase an estimated 10-15% of the current annual global lithium supply. As soon as Musk confirmed in 2014 that Tesla will “definitely” be on the lookout for local lithium sources, the boom in Nevada was on. And it isn’t just for juniors. Albemarle, a specialty chemicals company based in North Carolina, only took over the Silver Peak lithium mine in 2014. To get it, it had to pay US$6.2 billion to buy Rockwood Holdings Inc., Silver Peak’s former owner and at the time, the world’s largest producer of lithium products.

It’s not just Nevada, either, and it’s not just Musk. If the public buys electric cars from multiple manufacturers in the numbers that many are predicting, then global demand for lithium will soar. Citi Research, an international financial analyst company, estimates that by 2020 the global market for lithium-ion batteries will double in size to about US$40 billion.

Soon after the news broke about Tesla’s Gigafactory, “lithium prices went berserk,“ says Jon Hykawy, president of Stormcrow Capital and a recognized expert in lithium and alternative energy sources. “Historically, the price for technical grade lithium was in the range of $4,000 to $5,000 per tonne. But [in early 2016] we saw those prices spike to more than $10,000, while spot prices in China reached more than $22,000 per tonne.”

Hykawy says those prices, which rose in a speculative reaction to a small increase in demand driven by battery makers’ desire to stockpile supplies, have already begun to recede and he expects that trend to continue gradually simply because the world has a lot of lithium. “We’ll never have a fundamental shortage, but the market does require some juniors to come into the space.”

Beyond the production in Nevada, Lithium is extracted from brine deposits primarily in Chile, Argentina and Bolivia, as well as from hard rock deposits in Australia and Canada. The hard rock method is twice as expensive as brine, but it allows the metal to be extracted much faster, a matter of days compared to 18 to 24 months for each batch of brine.

It’s a top-heavy industry. Four companies control about 90% of world output: Albemarle and FMC Corp. of the United States, SQM of Chile and Tianqi Lithium of China. All are thought to be keeping production below demand levels to support high prices. Backed by exuberant investors, new entrants are now competing to develop projects to the point of production. The juniors are really the only option for investors in this sector, as lithium is only a small part of the big four’s operations and their stock performance.

Lithium poses some unique challenges for newcomers trying to break into the industry. “There is no cookbook,” says Highsmith, referring to the technical complexities of lithium production. The murkiness also extends to the lithium market and the vagaries of supply and demand.

Unlike other metals, lithium isn’t traded on public exchanges. Instead it’s sold through long-term contracts or in spot markets for quick delivery. “When you mine gold it’s gone,” says Highsmith, “but that’s not the case with lithium. You have to seek out customers and set up contracts. In this business, if you don’t have customers lined up ahead of time then you really don’t have a mine.”

Battery barn? An early construction shot of Tesla’s world-changing Gigafactory in Nevada

Little wonder, then, that his own Pure Energy snagged a lot of market attention in 2016 when it became one of the first juniors to announce it had a deal in place to supply Tesla an undisclosed amount of lithium. Given the timelines involved, the deal is contingent on whether Pure Energy can produce the lithium compound on time and at an attractive price.

Highsmith only joined Pure Energy as CEO in 2015. A 26-year veteran of the mining industry, he had prior experience with lithium as CEO of another Canadian junior, Lithium One Inc. Under Highsmith’s watch, that company discovered a hard rock lithium deposit in Quebec. Lithium One then merged with Galaxy Resources Ltd., of Australia, in 2012 in a $120-million stock takeover.

Adding Highsmith wasn’t Pure Energy’s only big move in 2015. That year, in fact, it was named the TSX-Venture Exchange’s top-performing mining company, posting a 167% share-price increase. Given how gloomy the mining markets were back then, it’s probably not surprising to learn the second-best performing mining company on the TSX-V that year was also a lithium play—Nemaska Lithium Inc. (TSX:NMX), a Quebec City-based junior that graduated to the TSX in July 2016, at the same time it raised a not-so-junior $69 million in a new share offering.

Nemaska’s project is unique in that it is located in Canada (in the James Bay area of Quebec) and because it has already passed the permit stage. “We’re one of only three lithium projects around the world that are currently fully permitted and ready to build,” says CEO Guy Bourassa, who expects production at the Whabouchi mine will begin in 2018.

In addition to receiving those federal and provincial approvals, Nemaska has inked two multi-year supply agreements. The first is with Johnson Matthey Battery Materials, which has agreed to buy lithium salts from Nemaska. The other deal is with the machinery and chemical giant FMC, under which Nemaska will provide FMC with 8,000 metric tonnes per year of lithium starting in mid-2018.

Nemaska claims to have an edge on the competition due to its unique, electro-chemical refining process, which will transform spodumene (lithium ore) concentrate into high-purity lithium hydroxide and carbonate, while reducing costs and greenhouse gas emissions. The economic advantage comes from eliminating the requirement for soda ash, a relatively expensive product in the process. The price tag for a planned commercial processing plant in Shawinigan, Que., is $521 million, with about $200 million already pledged by the Quebec government. Thus far, it has only built a miniature demonstration plant to produce 435 tons of lithium per year that will allow the company to send samples to prospective buyers.

“Nemaska will easily be the world’s largest manufacturer of battery-quality hydroxide,” predicts CEO Guy Bourassa. “In my view, we should be providing 40-to-45% of supply within five years.”

Every junior in a trendy market needs to be generous with superlatives, of course. Pure Energy, for example, is touting a lithium brine extraction technology that it says can revolutionize the industry. It employs a technology developed by an Italian company called Tenova Bateman that uses a solvent to extract the lithium from the brine instead of assembling the huge and unsightly evaporation ponds that dominate the industry in South America. Highsmith says it will allow the company to produce lithium at a much faster rate and with minimal impact on the land. “The conventional evaporation method takes about two years to recover lithium, but with this technology we can start recovering lithium within a couple of days.”

IF YOU WORK YOUR WAY through the other lithium juniors listed in Toronto, you find variations on the same themes. Companies raising money through private placements and the odd public issue, pouring that money into claims, drilling and testing, hiring financial firms to drum up institutional investment, and so on.

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The wave of new firms hasn’t crested, either. Just last year, both Millennial Lithium Corp. (TSX-V:ML) and Advantage Lithium Corp. (TSX-V:AAL), each based in Vancouver, emerged as newly minted public entities after share swaps and reverse takeovers. Each has its sights set on Argentina.

They’re also moving fast. Advantage Lithium turned some heads, for example, when it signed a joint-venture agreement in November 2016 with Orocobre, an Australian company that is one of only two junior lithium producers in the world. Orocobre went public in 2007 and made the leap from explorer to developer to producer in seven years when its Olaroz lithium facility came onstream in Argentina.

According to the terms of the deal, Orocobre acquires 31% of Advantage’s stock and gets two spots on its board of directors. In return, Advantage will acquire 75% of Orocobre’s advanced Cauchari Project , a resource that hosts about 470,000 tonnes of lithium carbonate equivalent, plus five other lithium brine projects. As well, Orocobre is going to let Advantage use its production facility, which would otherwise cost $300,000 to $400,000 to build.

In a recent interview, Orocobre CEO Richard Seville said that he entertained a flood of offers before deciding to hook up with Advantage Lithium, a decision that he attributed to Advantage’s CEO, David Sidoo, who only took on the role last September. Orocobre needed a partner to develop some of its properties because its Japanese partners were pressing the company to double lithium production at its flagship Olaroz facility.

Sidoo is no stranger to the junior markets. A former Canadian Football League player, Yorkton Securities alumni and successful investment banker, he raised over $150 million for his two previous public companies and was the founding shareholder of American Oil & Gas Inc., which sold to Hess Corp. for over US$630 million in 2010.

Sidoo says his involvement in the lithium industry has been a whirlwind affair. A month after he became CEO, Dundee Securities and Canaccord Genuity arranged a 19-day around the world trip to raise money. “I had at least 70 meetings,” he says. The company is now doing a raise of between US$15 million and US$25 million that Sidoo says will be enough to fund all of their current projects.

For the moment, at least, it looks more money will continue to flow into lithium. Now that the overall mining market has picked up, there’s more options for investors and that could quickly become a factor if lithium juniors start to fail or the market for batteries doesn’t materialize quite as quickly as planned.

On the other hand, the great hope of lithium investors is that sales of electric vehicles will surge past estimates, and in conjunction with new energy storage solutions such as Tesla’s Powerwall technology, create a demand for battery-grade lithium that would overwhelm current production.

Either way, Jon Hykawy counsels caution. He says at the end of the day it will be difficult for new lithium producers to enter the market with a quality product at a cost similar to the majors any time soon. “The trick isn’t finding lithium, the trick is producing it inexpensively,” he says.

Rick Rule has a similar view. “I think that demand for lithium is going to continue to grow, but I also think that the big four lithium producers can easily accommodate the increase in demand growth. I see probably only two or three lithium juniors that are viable and I only see them being viable if they can sell long-term supply contracts to buyers like Tesla, who might do that in order to get away from an oligopoly supply situation, which is what it is burdened with now.”

Two or three juniors doesn’t sound like much, but for now at least, every CEO running a credible company in the lithium game is either hoping to hold on long enough to sell out for a big payday, or be one of the lucky few that are in it for the long haul.